Eurobonds: The Fiscal Version of Co-Signing a Loan for Your Unemployed Alcoholic Cousin Who Has a Gambling Addiction

Bailouts reward bad past behavior, encourage bad future behavior, and make the debt bubble bigger – thus increasing the likelihood of deeper economic problems. At the risk of stating the obvious, there’s a reason for the second word in the “moral hazard” phrase.

But I’m not surprised that politicians continue to advocate more bailouts. The latest version is the “eurobond,” sometimes referred to as “fiscal liability sharing.”

It doesn’t matter what it’s called, though, since we’re talking about the foolish idea of having Germany (with a few other small nations chipping in) guaranteeing the debt of Europe’s collapsing welfare states. Here’s how the New York Times described the issue.

When European leaders meet on Wednesday to discuss the troubles of the euro zone, France’s president will press the issue of euro bonds, his finance minister said in Berlin on Monday. …Pierre Moscovici, France’s newly appointed finance minister, traveled to Berlin for talks with his counterpart, Wolfgang Schäuble. In a news conference after the closed-door meeting, both characterized the exchange as friendly and productive, but Mr. Moscovici acknowledged that the two men, and their governments, had real differences of opinion over pooling obligations to use the credit of the strongest European countries to prop up the weaker ones, an approach achieved through euro bonds.

The good news is that the German government is opposed to this idea.

Steffen Kampeter, was much more forthcoming in reiterating German opposition to any such proposal. Mr. Kampeter called the joint bonds “a prescription at the wrong time with the wrong side effects,” in an interview with German public radio. “The government has repeatedly made clear that collective state borrowing — that is, euro bonds — are no way to overcome the current crisis,” said Georg Streiter, a spokesman for Ms. Merkel on Monday. “It is still the case that the government rejects euro bonds.” …German policy makers say, euro bonds would be comparable to the United States’ agreeing to pay off Mexico’s debts, almost like a blank check for nations that are in trouble for overspending in the first place. “Euro bonds are not where the keys to heaven lie,” said Michael Hüther, director of the Cologne Institute for Economic Research, because it would “mix up risk” and act as a disincentive for less competitive economies to reform.

The bad news is that the Germans support other bad policies instead.

Ms. Merkel has signaled flexibility on some of Mr. Hollande’s ideas, including more financing for the European Investment Bank and redirecting unspent European Union funds to try to fight unemployment.

And even when Merkel opposes bad policies, she indicates she will change her mind if one bad policy is mixed with another bad policy!

…the German government is staunchly opposed to euro bonds until deeper integration and harmonization of budgetary and public spending policies have been achieved.

If Ms. Merkel genuinely believes that political and fiscal union will solve Europe’s problems, she’s probably ingesting illegal substances. Centralization of European government will have the same unfortunate pro-statist impact as centralization of American government in the 1930s and 1960s.

Integration and harmonization simply means voters in the rest of Europe will take German funds using the ballot box.

Not surprisingly, all of the international bureaucracies are on the wrong side of this issue. The NY Times story notes that the European Commission is using the fiscal crisis to push for more centralization.

The European Commission floated the idea of bonds issued jointly by euro zone governments in November, suggesting that such “stability bonds” could be created “in parallel” with moves toward closer fiscal union, rather than at the end of the process, as the German government prefers, to “alleviate tension” in sovereign debt markets. “From an economic point of view this makes sense,” a commission spokesman, Amadeu Altafaj, said Monday. “But at the end of the day this is a political decision that has to be taken by the member states of the euro area.” Mr. Altafaj added that “any form of common debt issuance requires a closer coordination of fiscal policies, moving toward a fiscal union, it is a prerequisite.”

Mr Hollande…won backing from the OECD, which in its twice-yearly economic outlook specifically called for such bonds…“We need to get on the path towards the issuance of euro bonds sooner rather than later,” Pier Carlo Padoan, the OECD chief economist, told the Financial Times.

The fiscal pyromaniacs at the IMF also are pushing to make the debt bubble bigger according to the FT.

Christine Lagarde, the IMF chief, also called for more burden-sharing. Though she stopped short of explicitly backing euro bonds, she said “more needs to be done, particularly by way of fiscal liability sharing” – a thinly veiled reference to such debt instruments.

Episodes like this make me understand why so many people believe in conspiracy theories. Folks watch something like this unfold and they can’t help but suspect that people in these governments and international bureaucracies want to deliberately destroy the global economy.

This insanity is going to go on until a “far-right” (i.e. fiscally responsible) party gains an absolute majority, or a large enough minority, in a Northern or possibly Eastern European member of the Eurozone.
The country where this happens will then leave the Eurozone, since it’s the only way to stop draining money to Southern Europe, and get high inflation in return.
That will start a chain reaction in which all the Northern and Eastern members of the Eurozone, quit the Eurozone. Germany will be the last out, since they don’t want to be seen as anti-Europeans.

I recently made this prediction in a comment elsewhere, and hinted at it even earlier. I repeat it here because I want to be able to say: I told you so.
I can think of some scenarios in which my prediction would be wrong, but since I use a pseudonym, that’s not a problem for me.

European ultra-national unification only means that the wallets of the few remaining productive Europeans will be voted away at the ballot box – as a nearly extinct crop of exceptional Old World inhabitants is called upon to pay a now “even fairer share” of their efforts to distant unknowns a few streets away, a few blocks away, a few neighborhoods away, a few cities away, and now, also a few countries away. Until, as they say, everyone runs out of other people’s money and finally disintegrate in decline and despair.

BTW the same holds true for Americans whose wallets will be slowly initially — but as time goes by ever faster — voted away into worldwide averagedom by the UN, IMF, OECD and other ultra-national bureaucracies. And, yes, BTW that includes the wallets of the “occupy” folk, who, perhaps unbeknownst to them, are still in the top 20% of the world’s privileged and thus will inevitably meet the receiving end of their philosophy and be called upon to pay their “ever fairer share” to the world average. BTW, how did they get to the top 20%? Perhaps the capitalism, they so much deride?

The bottom line of history in this early 21st century remains the same. Three billion people are learning the virtues and prosperity generating competition of diversification and decentralization. As a result they are riding 6-10% annual growth trendlines and lifting world average annual growth to 4-5%. And how are the less than one billion 2% growth western voters in America, and Europe who is further ahead, respond to the competitiveness challenge? By “Unification and Centralization” for heaven’s sake, in Brussels and now also Washington. What is the western symbol for suicide?

I would though like to elaborate on Mr. Mitchell’s comment about the effect of American centralization in the 30’s and 60’s as if that was something Americans got over and eventually returned to growth. America in the 60’s and certainly 30’s still maintained so much of its initial endowment of freedom (the historical serendipity of an English minority philosophy seeding and prevailing in an almost brand new continent) that in spite of the collectivist mistakes of the 30’s and 60’s America maintained a wide margin of freedom and individualism compared to the rest of the world. But the world is very-very different today. After repeated permanent moves towards collectivism the initial American margin of freedom has now been all but exhausted and three billion emerging competitors are fast awakening, catching up, and moving themselves towards individualism and freedom, though their overall freedom levels remain modest. Still though, three billion competitors are moving towards individualism and freedom while the less than one billion westerners are responding by moving to collectivism.

The tipping point and end of American exceptionalism and empire is now near. You see that O election symbol? It’s the “event horizon”. Predictably, your Left is ever more resembling the European statist Left and your Right is ever more resembling your European statist Right – the movie is playing according to the well-oiled script. Naïve Americans are watching. The scary and irreversible parts are yet to come…

[…] The notion of eurobonds is particularly noteworthy since it would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain. That’s only a good idea if you think it’s smart to co-sign a loan for your unemployed and alcoholic cousin with a gambling addiction. […]

[…] I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling […]